"The Retreat From Moscow"
Within, Napoleon was dazed and pale. Perhaps this was not his fate?
Perhaps - he knew not what to think - he had some sin to expiate?
The man of glory trembled as a sudden unaccustomed dread
assailed his soul. He turned to God in anguish. 'Lord of Hosts', he said,
'Is this my punishment, to see my legions scattered on the snow?'
- Victor Hugo (from "Russia 1812")
The beatings across the equity marketplace probably felt a lot worse than they actually were. We knew that capital would flood into Treasury debt securities this week and probably next. This was a little early, but it's not like we did not know it was coming. We, or I should say, I thought that equities might react a bit differently (maybe even rally) than how at least these very early results read. Perhaps it all does make sense. Perhaps we can see what passes in the year 2021 for price discovery for what it is, adjust fire, adapt to a changing environment, and ultimately overcome whatever obstacles that present in between here and there... there being not where we have to go, but where we would prefer to go. Come... grab a coffee. The rest of the family will start getting up for work in a few hours. Let us get together and think our best thoughts.
We know that Tuesday's sell-off was quite broad. The three majors all closed in the red. Some might be surprised to see the Nasdaq Composite down 1.1%, with the Dow Industrials -0.9% and the S&P 500 -0.8% as the yield curve flattens. All is not as it appears. I will explain. As new infections of Covid-19 force global (and state) economies back into shutdown, there is now far less confidence in the re-opening trade. Breadth on Tuesday was about as close to catastrophic as one ever sees on an only mildly lower day. At the NYSE, losers beat winners 7-2, while declining volume beat advancing volume by roughly 8-1. At the Nasdaq, losers beat winners 7-1, while declining volume beat advancing volume by almost 3 -1. Aggregate trading volume increased day over day at both primary equity exchanges, which means that there was some panic, at least among some professional managers who went into distribution mode.
The daily sector performance tables were incredibly precise in their distinct prejudice. Three of 11 sectors finished Tuesday in the green... all defensive types (Utilities, Staples, REITs). The best of the worst were the growth types... Technology and Communication Services. Then among the bottom six sectors were the five cyclical groups with Materials , Industrials, Energy, and the Financials all losing significant ground.
Just as one sees the pressure as broad-based, just as the trader throws his or her hands up in the air, he/she sees it. There was indeed a bright spot. Within the Technology sector, the Dow Jones US Software Index scored a daily gain of 0.4%. Hmm... not only that. We know that the small to mid-cap indices have been severely beaten for almost two weeks straight now, but across the large-cap landscape, the Nasdaq 100, which contains the Nasdaq's 100 largest companies excluding financials only gave up 0.53% on Tuesday, easily beating all of its peers, except... the S&P 100 (-0.46%) which is really the cream of the S&P 500 crop and contains many of the same big/large (mega) cap names that populate the Nasdaq 100. The great rotation unwind that has been in place for much of March is still intact. Investors are still moving out of value and into growth. Sometimes, defensive behaviors intervene. For a day. Or more. On Tuesday, perhaps this was less visible in real-time as even the beneficiaries of this unwind were for the most part... found to be in retreat.
In other words, the enemy has popped a flare. Your night vision is now useless. Get real low to the ground. Cover one eye, so as not to lose your "natural night vision", and move onward with your mission at reduced speed. Be fully cognizant that the enemy has probably also mined the trail. Look for anything that doesn't quite belong. Not the end of the world, just stay cool. Slow is smooth. Smooth is fast. Understand? Smooth is fast.
He Said/She Said
Those looking for a catalyst for Tuesday's beatdown had plenty to choose from. First, we'll start with World Health Organization Director-General Tedros Adhanom Ghebreyesus. Tedros? Hasn't he and the WHO lost all credibility since the whole pandemic started? Perhaps, some... domestically, but not really globally. Tedros, speaking at a WTO (World Trade Organization) event said that "Cases are increasing in most regions." He referred to the current state of the pandemic as "Truly worrying" and added, while addressing the inequity of the global rollout of the availability of vaccination that these worrying trends could put the world back at "square one". You may or may not like Tedros. That may or may not be political. High speed trading algorithms reacted to his words. That's a fact.
Tuesday morning also brought to the public the testimonies of Fed Chair Jerome Powell and Treasury Secretary Janet Yellen before the House Financial Services Committee. This dog and pony show takes its act to the Senate Banking Committee on Wednesday morning. The problem on Tuesday for investors may or may not be the statement that came from Yellen when she said... "We do need to raise revenue in a fair way to support the spending that this economy needs to be competitive and productive." Madame Secretary went on... "A package that consists of investments in people, (&) investments in infrastructure will help to create good jobs in the American economy and changes to the tax structure will help to pay for those programs."
Bang. It did not matter what Powell or Yellen said after that. Full employment? Bologna. Keyword reading algorithms (and portfolio managers) picked up on the comments made around raising taxes. It does not take genius to figure out that reducing corporate profits prior to completing economic recovery would decisively impair labor market recovery. This is Economics 101. Senate Banking Committee members will focus on this today. Let's hope that the secretary has found a more delicate way to word this message. I imagine getting Congress to understand freshman year level economics would be asking a bit too much. Probably way too much. Yellen knows better. Oh, I am not done with her today.
Down Goes Frazier
Down goes crude oil. May WTI settled at $57.76 per barrel on Tuesday, down 6.2% for the session, as the re-opening trade unwind impacts far more than just debt and equity markets. The good news, if you want to call it that, is that oil prices are rallying sharply overnight as "The Ever Given", a giant container ship has become stuck in the Suez Canal and could be stuck there for days. The ship weighs a rough 224K tons, and the smaller than average sized tug boats that work the canal are no match for the vessel. This is going to be this week's big story in energy.
Special Drawing Rights. Uh oh.
Remember when I wrote to you (on several occasions) that if a global reserve currency ever replaced the U.S. dollar as the planet's reserve currency of choice, that it would come disguised as the IMF's Special Drawing Rights (SDRs)? Well, buckle up, buttercup.
News broke on Tuesday that the executive board of the International Monetary Fund (IMF) has been discussing the possibility of creating $650 billion worth of SDRs to "help" developing countries coping with this pandemic. The board is supposedly working on having a formal plan in place by June.
There are a couple of catches in place before the IMF can just print money at the expense of global, but mainly U.S. taxpayers. Reserves would be allocated to all 190 members of the IMF in proportion to their quota, meaning that 70% of these reserves would be distributed to the members of the G-20. Just an estimated 3% of these reserves would end up supporting the poorest or "frontier" economies. There has actually been a call within the G-20 for the IMF to create $3 trillion in SDRs, but thankfully with the U.S. as the IMF's primary sponsor (shareholder), no more than $650 billion can be created without U.S. congressional approval.
The cloak is the charade that these added reserves would be used to support vaccination and distribute resources across the poorest nations on earth. The reality (dagger) is that the vast majority of newly created reserves will benefit the already developed world that do have their own Treasury Departments and do have their own central banks. They merely ask that you and I, at the expense of our families, finance their printing press so that they do not have to.
Unfortunately, at least in the way the news is being presented, Treasury Secretary Janet Yellen appears to be on board with this idea. Let's hope for all of our sakes, that is not true. I'll tell you what... you want my approval for such an idea (which you have not asked for), how about these reserves are distributed inverse to quota, meaning that the poorest nations see the most benefit? What's that? I thought I just heard the enthusiasm for this idea cool down just a bit. Not only that... the U.S. gets veto power over distribution being we are being asked to finance the idea. This way, poor countries get some help, but not despots and terrorists that use poor countries as personal shields. That make any sense to you? As always, I am here if you need me, Janet.
1) Intel (INTC) wants to be the foundry to the world. Again. What do I think? I think CEO Pat Gelsinger sees INTC trading at 13 times forward PE, and all of the semiconductor equipment manufacturers trading at roughly 20 times. Good idea. Now. make it happen.
2) Marvell Technology (MRVL) receives Chinese regulatory approval for the Inphi (IPHI) deal. Is this a positive development for the Advanced Micro Devices (AMD) planned acquisition of Xilinx (XLNX) ? As a shareholder, I sure hope so.
3) Pfizer (PFE) begins human safety trials for an oral Protease Inhibitor that could block viral replication in Covid patients prior to severe illness. Wouldn't that be wonderful. Godspeed, Pfizer.
4) GameStop (GME) reported Q4 numbers on Wednesday night. EPS? Miss. Revenues? Miss. Questions asked? Zero. In one of the most incredibly amateurish acts of corporate (non) leadership that I can remember, GameStop just refused to take questions at Wednesday night's conference call. Go ahead... You own equity in a company unwilling to answer your questions. I'll find something else to do.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Feb): Expecting 0.9% m/m, Last 3.4% m/m.
08:30 - ex-Transportation (Feb): Expecting 0.6% m/m, Last 1.4% m/m.
08:30 - ex-Defense (Feb): Expecting 0.9% m/m, Last 2.3% m/m.
08:30 - Core Capital Goods (Feb): Expecting 0.6% m/m, Last 0.5% m/m.
09:45 - Markit Manufacturing PMI Flash (Mar): Expecting 59.4, Last 58.6.
09:45 - Markit Services PMI Flash (Mar): Expecting 59.7, Last 59.8.
10:30 - Oil Inventories (Weekly): Last +2.396MM.
10:30 - Gasoline Stocks (Weekly): Last +472K.
The Federal Reserve & US Treasury (All Times Eastern)
08:50 - Speaker: Richmond Fed Pres. Tom Barkin.
10:00 - Speaker: Federal Reserve Chair Jerome Powell.
10:00 - Speaker: Treasury Secretary Janet Yellen.
13:35 - Speaker: New York Fed Pres. John Williams.
15:00 - Speaker: San Francisco Fed Pres. Mary Daly.
19:00 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (GIS) (.84)